Patents and Innovation Economics

Harmonization of US patent law with other patent laws around the world is another trend that started in the 1990s. The first effort to start harmonizing US patent law with patent laws around the world, was the change in the term of a patent from 17 years from the date of issuance to 20 years from the date of filing, 35 USC 154. The arguments for this change included harmonization with the rest of the world, the effective term of most patents is unchanged, and the change eliminates submarine patents. Wikipedia defines a submarine patent as an informal term for a patent first published and granted long after the initial application was filed. Like a submarine, its presence is unknown to the public; it stays under water, i.e., unpublished, for long periods, then emerges, i.e., granted and published, and surprises the relevant market. Jerome H. Lemelson was the poster child for submarine patents. Mr. Lemelson had patents that issued in the late 1980s and early 1990s that were based on patent applications from the 1950’s, i.e., submarine patents. This was generally regarded as unfair, because a potential infringer would not have notice that a patent covered their product or process. Mr. Lemelson’s most successful patents were related to machine vision. However, many of the claims of his key patents on machine vision were held invalid in 2004.[1]

Other commentators have suggested that “submarine” patents were caused by the inefficiencies of the US Patent and Trademark Office (USPTO).[2] One of the most cited of these is patent No. 5,283,641 to Mr. Lemelson. This patent was subject to a 20 way divisional (the Patent Office required the original patent application be divided into 20 separate patent applications), which was the major cause of the delay in this patent issuing. The term “submarine patents” first appeared in Japan and may have been an attempt to persuade the US to adopt a Japanese style patent system. The Japanese patent system is widely viewed as unfriendly to individual inventors and small companies.

The next step in harmonization was the Intellectual Property and Communication Omnibus Reform Act of 1999. This required publication of US patent applications 18 months from the filing (priority) date, expect for patent applications that explicitly requested non-publication and will never be filed in a foreign country 35 USC 122 (b). The argument for this change besides harmonization is increased patent quality and notice to potential infringers. By publishing patent applications, the invention would not remain hidden from the public and would add to the store of known prior art an Examiner at the Patent Office could cite against other patent applications. Large companies that filed internationally were in favor of this change. Large companies generally file their patent applications in foreign jurisdictions, almost all of which publish patent application at 18 months. As a result, their patent application are published at 18 months anyway. Small and independent inventors were against this change in the patent laws. Independent inventors were placated with the promise that most patent applications issue around 18 months from the date of their filing anyway, so they were not giving up any significant amount of time that their inventions were kept secret.

While this legislation was not widely seen as anti-patent at the time, its effects have clearly been to enhance the rights of adopters of technology at the expense of creators of technology. The publication rule is a clear violation of the social contract between the inventor and society. Under the publication rule, society gets the advantage of the disclosure of the invention even if the inventor never receives any property rights in his invention. Before the publication rule if an inventor felt that the scope of the claims to his invention were too narrow or not allowable, he could withdraw his application and keep his invention a trade secret. Narrow claims are easy for a competitor to design around providing little protection in exchange for the disclosure of the invention. In other words if the inventor did not like the deal he was offered from the Patent Office he could reject it and keep his invention a secret. Even for inventions that can be reverse engineered once the invention is marketed, this is a better deal than the publication rule. Under the publication rule, it is easy for competitors to find the inventor’s idea on the World Wide Web and copy the invention. Without publication, a competitor has to spend the time and money to reverse engineer the invention. This is significantly more costly than reading a patent application that describes the invention in “enough detail that one skilled in the art can practice the invention.” 35 USC 112. The publication rule is perhaps the most egregious anti-patent change in the patent laws in the history of the US. It does not promote the useful arts, since it decreases the incentive to file for a patent, which also decreases the diffusion of knowledge by the patent system. The publication rule should be declared unconstitutional, but as we will see, it is unlikely any relief will be forthcoming from the US Supreme Court.

Presently there is a proposal to further harmonize our patent laws with the rest of the world by converting our patent system from a “first to invent” to a “first to file.”[3] It is being sold as a minor change, since only about 1% of patent applications are ever involved an interference – a case to determine who is the first inventor. In addition, the first applicant to file wins most interference cases. However, this will further biases the patent system in favor of large corporations who can afford to file patents that are more speculative on incomplete inventions. Individual inventors cannot afford this expense and are likely to lose out in the race to the patent office. In addition, it is likely to result in poorly thought out patent applications and waste the US Patent Office’s resources. Other countries’ patent systems are not designed to protect the interests of small individual inventors and start-ups.

The stance of the courts has turned decidedly anti-patent since 2000. In 2006 the US Supreme Court decided eBay Inc v. MercExchange, L.L.C., 547 U.S. 388 (2006) holding that a permanent injunction should not automatically issue as part of a judgment of infringement. A patent is a legal right to exclude, 35 USC 154, others from making, using, selling (offering for sale), or importing the invention. It is a little known fact that a patent does not give the holder the right to use, make, sell (offer for sale) or import the invention.[4] The Supreme Court’s eBay decision denies a patent holder’s right to exclude others and substitutes monetary damages even if the patent holder prefers to enforce their right to exclude. The Supreme Court’s eBay decision overturned 20-25 years of jurisprudence that recognized that an injunction was the only relief a court could provide against an infringer that was consistent with a patent holder’s “right to exclude.”

In 2007 the Supreme Court in the Medimmune, Inc. v. Genetech, Inc., 549 U.S. 118 (2007), overturned a long-standing rule that a licensed patent user cannot file a declaratory judgment action when they have not breached the license terms. Article III of the U.S. Constitution prohibits going to court for an advisory opinion; there must be an actual controversy between parties with adverse legal interests. Under the Medimmune decision a patent licensee can sue the patent holder complaining the patent is invalid while claiming that they are not infringing the patent or in breach of the license. As a result, it is a no-lose situation for a licensee to file a declaratory judgment action against the patent holder claiming the patent is invalid. If the Licensee is successful in court, they no longer have to pay royalties to the patent holder and if they lose, they are in the same position as they were before the lawsuit was filed. The patent holder is forced to defend their patent with nothing to gain if they win; as a result, the patent holder has no actual controversy with the licensee. This case is clearly inconsistent with Article III of the U.S. Constitution.

In KSR International v. Teleflex, 550 U.S. 398 (2007) the Supreme Court made it easier to find a patent invalid and harder to obtain a patent by changing the standard for obviousness. In order to obtain a patent, the invention has to useful, novel, and non-obvious. The Supreme Court overturned 20 years of jurisprudence associated with an objective test of obviousness. The Supreme Court rejected any objective test of obviousness as too rigid. This more flexible approach increases the uncertainty that an inventor will receive a patent and increases the risk that their patent will be held invalid if they have to enforce their patent against an infringer. It also increased the costs associated with obtaining a patent and in enforcing a patent.

As a result of these three cases the Supreme Court has denied patent holders their “right to exclude”, allowed companies that license a patent to challenge the patent they licensed at no risk and made it more difficult for an inventor to obtain a patent and enforce the patent once it is obtained. Short of declaring the patent system unconstitutional, it is hard to see how the Supreme Court could have done more damage to the rights of inventors.

[4] Because of this, it is incorrect to state that a patent is a monopoly. A legal monopoly is a right to a market and includes both the exclusive right to sell into that market and the right to exclude others from selling into that market. A patent does not confer the right to a market or the right to sell the patented invention.